After vocal outrage from authors, e-publishers, and free speech activists, PayPal has shifted its "acceptable use" policy on e-books containing certain erotica content. The online payment company announced today that mostly books with images will be under scrutiny.

"First and foremost, we are going to focus this policy only on e-books that contain potentially illegal images, not e-books that are limited to just text," PayPal spokesman Anuj Nayar said in a statement today. "The policy will prohibit use of PayPal for the sale of e-books that contain child pornography, or e-books with text and obscene images of rape, bestiality or incest."

The whole debacle started last month when PayPal contacted a few e-book publishers saying they had to pull certain books with "obscene" content from their inventory or face having their PayPal services deactivated. The online payment company reasoned that it was complying with its agreements with credit card associations and banks and also following the laws on the sale of "adult-oriented" content.

Talks between the online payment company and e-book publishers ensued. The most vocal e-publisher, Smashwords, had meetings with PayPal regarding what would constitute banned content and seemed encouraged with the company's progress on the topic.

At one point, Smashwords founder Mark Coker wrote in a blog post, "We're not yet where we want to be (we want no censorship of legal fiction), but I sense we're a lot closer now than if we had simply packed up our marbles, flipped 'em the bird and quit PayPal for an alternative as many encouraged us to do."

As the talks proceeded, the nonprofit Electronic Frontier Foundation also launched its own campaign. In collaboration with other free speech groups, including the American Civil Liberties Union of Northern California, Authors Guild, and the PEN American Center, the nonprofit sent a protest letter to PayPal. Since then, several more organizations signed onto the campaign.

In addition to focusing chiefly on books with images, PayPal also clarified that it will no longer demand that publishers remove all books in a category. Instead, it will identify specific books that it believes violates its policy and then give the e-publisher an opportunity to respond and challenge the notice.

"To be clear, we have not shut down the PayPal account of any of the e-book publishers involved in this matter," Nayar said. "PayPal is committed to working with publishers on a mutually acceptable process to address potentially offending books on their sites so that material with images that violate this policy cannot be purchased using our service."

Both Smashwords and EFF are happy with the outcome. "The Internet cannot be a true global forum for expression if private companies that provide communication and payment services operate as morality police," EFF Staff Attorney Lee Tien said in a statement. "We're especially pleased that PayPal will only target specific works and not entire Web sites."